The Finance Act of 2004 had proposed to withdraw tax exemptions extended to NRE deposits from April 1, 2005. Finance ministry officials acknowledge this would impact existing contracts for deposits entered by banks as the interest accrued up to March 31, 2005, but paid on or after April 1, would come under the tax net.
Public sector banks made a strong pitch for retaining the status quo on tax exemptions on NRE deposits in their meeting with finance minister P Chidambaram on January 28. The proposal was being seriously considered, senior finance ministry officials said.
Revenue department officials said the exemption was withdrawn after considerable discussion based on the recommendations of the Vijay Mathur committee. While pointing out that a complete withdrawal would result in a revenue loss of Rs 600 crore, they said there was a case in banks demand to tax only new deposits and renewals.
Besides, the finance ministry is also likely to rectify the TDS (tax deduction at source) anomaly between Indian banks and foreign banks.
While foreign banks will be required to deduct TDS at 33.66%, an Indian bank will have to pay a TDS of 22.44%. A uniform 10% rate was being considered for TDS on interest paid on NRE deposits to reduce administrative hassles, the officials said.
Withdrawal of tax exemption on NRE deposits was the second blow dealt to NRIs after the RBI capped the interest rate on NRE rupee deposits of 1-3 year tenure to 2.5% plus Libor in July 2003. Despite this, bankers estimate fresh accretion of close to Rs 50,000 crore during the last 18 months.